Data points to continued growth for manufacturing

Beneath all the recent news, noise and distractions generated by hurricanes and the midterm elections, the U.S. economy is steadily humming along. To be more specific, many of the data series that measure the important activity levels for both the U.S. manufacturing sector and the plastics industry continue to register improvement at a rate that is solid yet also sustainable for the foreseeable future.

Good examples are the recent trends in new orders for manufactured goods, and more specifically durable goods. According to Census Bureau data, new orders for all types of manufactured goods (both durable and nondurable) increased by nearly 7 percent in September when compared with a year ago. For the year to date, this series is up by almost 8 percent.

Many plastics products, such as packaging and some major end markets for plastics, such as food products, are categorized as nondurable goods, so I always want to know how this data series is performing. But the nondurables data series is too heavily influenced by end markets like petroleum or chemical products that are not particularly large users of plastics products. For this reason, the data series that exhibits the strongest historical connection to demand for most types of plastics products is demand for durable goods.

If we drill down to just the data for new orders of durable goods, the news is most encouraging. In September, new orders escalated 8 percent when compared with a year ago. For the third quarter, new orders for durable goods advanced 10 percent over last year, and the gain for the year to date is 9 percent.

As the chart illustrates, this data series appears to be hitting its cyclical peak, and the level is quite favorable by historical standards. My forecast calls for the growth rate to decelerate gradually through next year. But as of now, I still expect that the growth rate will remain positive next year.

Often times in the history of this data, a cyclical high is followed by a cyclical low point that is well into negative territory a few quarters later. So there is a possibility that I will need to adjust this forecast downward in the coming quarters. But I believe there is still enough juice left as a result of President Donald Trump's recent tax cuts and deregulation program to keep a floor under business investment spending for a while longer.

Bill Wood

And if there is any progress made in the trade situation with China in the next few quarters, there is a chance that I will need to adjust this forecast upward in 2019.

To be clear, I do not want the growth rates to accelerate from their current levels. Aside from my overly sensitive need for accuracy in reporting, I want to be very specific about these data series and their respective growth levels because I believe the manufacturing sector is right at this moment approaching an upper boundary. It is currently growing at a rate that is robust, and everybody likes strong growth. But if it were to accelerate from this level, it would overheat.

Faster manufacturing growth would drive up labor and materials costs substantially faster than the overall rate of productivity growth. The result would be a sharp increase in inflation, and subsequently a sharp rise in interest rates. This is typically what happens at the end of an economic growth cycle, and the next phase is a recession.

We may get to this scenario at some point in the future, but I do not believe we are there yet. The trends in materials and labor costs are moderately upward, but the risk of a rapid rise still appears manageable. This is what it means to be near the upper boundary in terms of economic growth rates: We can sense the danger that would be presented by a rapid rise in inflation or interest rates, but at the present time, the risks are balanced, and the situation is still under control. We can continue to grow at a healthy pace as long as confidence levels stay strong and investment spending is sustained. We do not need more speed here; we need persistence.

That is the best way to get all sectors of the economy balanced and rising. This is an especially important concept for the plastics industry as we prepare for the coming year. The upward pressures stemming from rising wages and health care costs are universal across all sectors of the economy; however, there are some segments of the U.S. manufacturing sector that likely have the capacity to grow at a faster rate than they are currently experiencing. The plastics industry is in this category.

The data from the Census Bureau indicates that while overall demand for manufactured goods is growing in the range of 7-9 percent so far this year, overall demand for plastics products is up only 2-3 percent through the first three quarters of 2018. This corroborates other data from the plastics industry this year, which indicates that output of plastics products is up about 2 percent and the capacity utilization rate has drifted down below 80 percent.

My forecast calls for the growth rate for the plastics industry to put in a cyclical low point in the next quarter or two, and then growth will start to accelerate gradually through most of next year. I do not expect the overall pace of growth to get much higher than 3 percent per year for the foreseeable future. But this pace, combined with ongoing productivity gains, will be enough to generate strong profits in the industry without driving up operating costs.

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